The IRS Form 990: A Tool for Understanding Organizational Capacity. Hilda Polanco, CPA, CCSA, CGMA Founder and CEO, FMA

Transcription

1 The IRS Form 990: A Tool for Understanding Organizational Capacity Hilda Polanco, CPA, CCSA, CGMA Founder and CEO, FMA March 30, 2016

2 Welcome and Introduction IRS Form 990: Background Summary & Program Service Accomplishments Governance & Leadership Operating Reserves & Other Key Financial Indicators Public Support & Fundraising Other Areas of Note 2

3 What do you think of when you think about organizational capacity? 3

4 Critical Questions What are the organization s programmatic activities? How strong is the organization s governance function. What does it say about leadership? What does the 990 tell us about fundraising activities and the level of public support? 4

5 Three Key Questions About Financial Health 1. How strong are the organization s reserves? How liquid are they? 2. How many months of operations can be covered with available cash? 3. What are the trends in operating results? Surpluses or deficits? How is the organization investing its resources? 5

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9 THE IRS FORM 990: BACKGROUND

10 What is it? Information return for organizations exempt from income tax Provides the IRS and state charity agencies with information to assist them in enforcing the laws governing nonprofits The most publicly available document about an organization 10

11 What Are the Filing Requirements? Annual gross revenue of $50K or less: 990-N (E-postcard) Annual gross revenue of $200K or less and total assets of less than $500K: 990-EZ or 990 Gross revenue greater than $200K, or total assets of $500K or more: 990 Extensions on the due date: organizations may request an automatic 3-month extension without showing cause; another 3- month extension may be requested where reasonable cause is explained 11

12 How is Data in the 990 Different from the Audit? Form 990 does not provide detail about donor-imposed restrictions on revenue Does not show board designated net assets In-kind donations of services are not recognized in the 990 Sales of merchandise, special events, and rental activities are shown on the 990 net of expenses Audits conform to Generally Accepted Accounting Principles (GAAP), which is not required of data in the 990 Source GuideStar: Retrieved from: 12

13 SUMMARY & PROGRAM SERVICE ACCOMPLISHMENTS

14 Front Page: Part I, Summary

15 Front Page: Part I, Summary (continued) Key Question: How long after the end of the fiscal year was the organization s 990 filed? 15

16 Schedule O 16

17 Part III: Statement of Program Service Accomplishments

18 Every organization can update its profile on Guidestar.org Different seals awarded based on level of information shared: Bronze, Sliver, or Gold Organizations can answer 5 charting impact questions: What is your organization aiming to accomplish? What are your strategies for making this happen? What are your organization's capabilities for doing this? How will your organization know if you are making progress? What have and haven't you accomplished so far? 18

19 GOVERNANCE & LEADERSHIP

20 Part VI, Section A: Governing Body and Management Use of management company Changes to organizational documents Documentation of board and committee meetings Presentation of 990 to board List of officers, directors, trustee or key employees Did the org become aware of a significant diversion of assets? Key Questions: How many board members? Are they reviewing the 990? Is there an unusual management structure? 20

21 Part VI, Section A: Governing Body and Management

22 Part VI, Section B: Policies Conflict of Interest Monitoring and enforcement of conflict of interest policy Whistle Blower Policy Document retention and destruction Key Questions: Does the organization have appropriate governance policies in place to set the right tone at the top? 22

23 Part VI, Section B: Policies

24 Part VI, Section C: Disclosure States in which 990 is filed How key documents are made public Key Questions: How wide is this organization casting its fundraising net? How committed to transparency are they? 24

25 Part VI, Section C: Disclosure

26 Part VI, Section B: Policies Process for determining compensation. Process should include: A review and approval by independent persons Comparability data Contemporaneous substantiation of the deliberation and decision Key Question: Is there a deliberate, fair, comprehensive process to set compensation for leadership? 26

27 Part VI, Section B: Policies

28 Part VII, Section A Highest compensated employees (paid $100,000 or more) Current and past officers, key employees, directors, and trustees receiving more than in $100,000 in compensation Key Questions: Does compensation seem reasonable? Are there significant pay disparities between employees? Are any board members being paid? 28

29 Part VII: Compensation

30 Schedule J Provides additional information on compensation practices for officers, directors, trustees and key employees Key Questions: Did the organization pay for first class or charter travel? Was there access to discretionary spending accounts? Did the organization pay for business use of a personal residence? Were personal services (e.g. maid, chauffeur, etc.) provided? 30

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32 Three Key Questions About Financial Health 1. How strong are the organization s reserves? How liquid are they? 2. How many months of operations can be covered with available cash? 3. What are the trends in operating results? Surpluses or deficits? How is the organization investing its resources? 32

33 OPERATING RESERVES & LIQUIDITY

34 Why do organizations need operating reserves? Unexpected shortfall in revenue Unexpected demands on resources Unanticipated opportunities Inevitable instances of less than perfect judgment and foresight The need for a change in direction Normal day-to-day fluctuations in income and expenses and associated cash flows Source: Operating Reserve Policy Toolkit for Nonprofit Organizations, sponsored by the National Center for Charitable Statistics, Center on Nonprofit and Philanthropy at the Urban Institute, and United Way Worldwide 34

35 What We Own: Cash What We Owe: Bills due Receivables Investments Property, Plant & Equipment, net Assets = Liabilities + Net Assets Line of Credit Deferred Revenue Long-term Debt Our Available Capital Unrestricted Board Designated Fixed Assets Other Temp. Restricted Perm. Restricted

36 Audit: Statement of Financial Position 990: Balance Sheet (Part X)

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38 IRS Form 990: Balance Sheet 38

39 IRS Form 990: Balance Sheet (continued) 39

40 Accessibility LUNA / Working Capital Short-term Liquid Capital Debt Repayment Facility Reserve Growth & Innovation Longer-term Reserves (may be board designated) Temp. Restricted Net Assets* Endowment** Donor restricted capital *To be accessed only if delivering on donor expectations **Only earnings are accessible

41 Liquid Unrestricted Net Assets (LUNA) The portion of unrestricted net assets that could be converted to cash relatively easily (may or may not include board designated funds, based on accessibility) Funds available for purposes such as supplying working capital, guarding against downturns, and pursuing new opportunities LUNA = Unrestricted Net Assets (Fixed Assets Mortgages) Benchmark: LUNA sufficient to cover 3-6 months of operating expenses is generally consideredd healthy, but this depends on an organization s business model, plans, and goals. 41

42 Using the Form 990: Liquid Unrestricted Net Assets (LUNA) Calculation using the 990 Location in 990 Unrestricted Net Assets, End of Year Part X, column (B), line 27 Net Fixed Assets Part X, column (B), line 10c + Mortgages Part X, column (B), line 23 Total LUNA (Total Expenses 12) Part IX, column (A), line 25 Months of LUNA 42

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44 Calculating LUNA: Example

45 Months of Cash on Hand Calculation using the 990 Location in 990 Cash, non-interest bearing Part X, column (B), line 1 + Savings and temp. cash investments Part X, column (B), line 2 Total Cash and Equivalents (Total Expenses 12) Part IX, column (A), line 25 Months of Cash on Hand 45

46 OTHER KEY FINANCIAL INDICATORS

47 Three Key Questions About Financial Health 1. How strong are the organization s reserves? How liquid are they? 2. How many months of operations can be covered with available cash? 3. What are the trends in operating results? Surpluses or deficits? How is the organization investing its resources? 47

48 Audit: Statement of Activities 990: Stmt of Revenues (Part VIII) 990: Stmt of Expenses (Part IX)

49 Two columns

50 Front Page: Part I, Revenue and Expense Only one column 50

51 Calculating Operating Results Calculation using the 990 Location in 990 Unrestricted Net Assets, End of Year Part X, column (B), line 27 Unrestricted Net Assets, Beginning of Year Part X, column (A), line 27 Change in Unrestricted Net Assets* *Represents operating surplus or deficit for the year 51

52 Calculating Operating Results Calculation using the 990 Location in 990 5,159,362 Part X, column (B), line ,081 Part X, column (A), line 27 $4,395,281 52

53 Audit: Statement of Functional Expenses 990: Stmt of Functional Expenses (Part IX)

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55 Part IX: Statement of Functional Expenses Are expenses spread across all three columns? 55

56 Functional Expense Composition Calculation using the 990 Location in 990 Total Program Expense Total Expense Part IX, column (B), line 25 Part IX, column (A), line 25 Total Management & General Expense Total Expense Total Fundraising Expense Part IX, column (C), line 25 Part IX, column (A), line 25 Part IX, column (D), line 25 Total Expense 56 Part IX, column (A), line 25

57 Part IX: Statement of Functional Expenses

58 PUBLIC SUPPORT & FUNDRAISING

59 Public Support Test and Tipping Tipping: Occurs when a donor makes so large a grant that the grantee fails the IRS public support test and is tipped out of public charity status into private foundation status. Public Support Test: charities must prove that they receive at least onethird of their total support in contributions from the general public. Key Questions: Is the organization over-reliant on one funder? If so, what risks may that pose? 59

60 Schedule A: Public Charity Status and Public Support

61 Key Questions on Fundraising Part I: Types of fundraising activities conducted; engagement of outside contractors for fundraising Part II: Financial return on special events Key Questions: Who is doing fundraising for this organization? How are they doing on special events? 61

62 Schedule G: Fundraising Activities

63 Schedule G: Fundraising Activities (continued)

64 OTHER AREAS OF NOTE

65 Schedule D: Depreciation of Fixed Assets Shows depreciation of fixed assets by category: land, buildings, leasehold improvements, and equipment Key Questions: How depreciated are the organization s buildings and equipment? If highly depreciated (over 80%), are there reserves to fund replacement/repair? 65

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67 Some Additional Questions to Consider: Part IV, Question 26: Did the organization take out a loan from a board member? (if so, more info will be provided in Schedule L) Part IV, Question 32: Did the organization sell or transfer more than 25% of its net assets (if so, more info will be provided in Schedule N) Part XII, Question 2c: Does the organization have a board committee that oversees the audit process? 67

68 RESOURCES

69 The Key to Long Term Financial Health Liquid Unrestricted Net Assets (LUNA), Hilda Polanco, New York Nonprofit Press, May 2012: term-financial-health-liquid-unrestricted-net-assets-luna- Maintaining Nonprofit Operating Reserves: A Whitepaper, by the Nonprofit Operating Reserves Initiative Workgroup, December Public Support Test: What is Tipping? Rasmuson Foundation: IRS Form 990: Overview and Resources, Independent Sector: Management/Pages/Resource-Center-for-Good-Governance-and-Ethical- Practice.aspx 69

70 Excel Tool (for Audits) Coming in April: Online Tutorial 70

71 StrongNonprofits.org In collaboration with the Wallace Foundation, FMA has created a library of tools and resources to help organizations become fiscally fit Four Topic Areas: Planning Monitoring Operations Governance 71

72 Online Tutorials for StrongNonprofits.org FMA offers complimentary orientation one-hour webinars that feature an overview of the website and drill down on several of its key resources Upcoming webinar dates: April 20th at 3:00pm June 2nd at 2:00pm To register, or see upcoming webinar dates: For a 15-minute, on-demand webinar tour of the site: 72

73 QUESTIONS?

74 Established in 1999 to serve not-for-profit organizations around the country Provides customized financial management, accounting, software, organizational development, human resources, and other consulting services Works directly with organizations or through funder-supported management assistance programs FMA's mission is to empower not-for-profit organizations with the knowledge and skills to successfully serve their constituents and fulfill their missions Hilda Polanco, CPA, CCSA, CGMA New York Chicago Oakland LA /FiscalManagementAssociates linkedin.com/company/fiscal-managementassociates-llc